This is the author’s version of a work that was submitted/accepted for pub-lication in the following source:

Wolff, Leon(2000)Private governance of public rights in Japan: Revisiting the Japanese gov-ernance debate.Pacific Economic Papers, 302, 3.5-3.27.

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13

Private Governance of Public Rights in Japan:Revisiting the Japanese Governance Debate

Leon Wolff1

The Australian National University

CONTENTS

Introduction ....................................................................................... 3.5

The Japanese governance debate: the ‘invisibility’ of theJapanese corporation ....................................................................... 3.7

Corporate compliance in Japan: the ‘visibility’ of theJapanese corporation ..................................................................... 3.10

Beyond traditional legal thinking: new conceptual ‘glasses’to render the invisible Japanese corporation visible .......................... 3.16

Conclusion ....................................................................................... 3.22

Notes ........................................................................................................ 3.24

References ................................................................................................ 3.24

PRIVATE GOVERNANCE OF PUBLIC RIGHTS IN JAPAN:REVISITING THE JAPANESE GOVERNANCE DEBATE

Introduction

Dramatic growth in the Japanese economy in the postwar period – and its meltdown in the

1990s – has attracted sustained interest in the power dynamics underlying the management

of Japan’s administrative state. For a long time, scholars and commentators have debated

about who wields power in Japan. The question has been asked in different ways. In the 1970s

and 1980s, the question was usually posed as: who orchestrated Japan’s economic miracle in

the 1960s and 1970s? Today, the question is usually reframed to: who is accountable for the

policy failures that plunged Japan into financial crisis and recession during the 1990s? Yet

the core issue remains the same – who governs Japan? (Johnson 1995).

Scholars are divided in their responses. Some, for example, maintain that Japan’s

bureaucracies dominate the policymaking process and exert an all-powerful influence over the

economic management of the nation (Kaplan 1972; Campbell 1977; Johnson 1982; Zysman

1983; Anchordoguy 1989; van Wolferen 1989; Kato 1994; Keehn 1997). The best-known

proponent of this view is Chalmers Johnson who, in his pathbreaking study of MITI (Johnson

1982), paints a picture of an omnipotent Japanese developmental state that planned,

engineered and effected Japan’s postwar economic success by exercising control over industry.

Others, such as Ramseyer and Rosenbluth (1993), rely on a rational choice paradigm of the

interaction between politicians and bureaucrats to submit that bureaucrats regulate accord-

ing to a political script. They suggest that because the Liberal Democratic Party has formal

veto power and control over civil servant promotions and salaries, the bureaucracy in reality

implements policies in the shadow of its political leaders.

This paper argues that this bifurcation overlooks an important actor in Japan’s power

politics – the Japanese corporation. My thesis is that Japanese corporations exert significant

public policymaking powers in Japan. In fields as diverse as environmental management and

gender equity, Japanese corporations are devising and implementing their own public policy

agendas. The paper suggests that the current formulation of the governance debate in Japan

– whether it is politicians or bureaucrats who run Japan – rests on a conceptual oversimpli-

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fication of law. This oversimplification derives from the traditional categorisation of law into

‘public’ (e.g. administrative) and ‘private’ (e.g. corporate) law. Such a categorisation implies

a rigid demarcation of power boundaries – public versus private – despite growing evidence

of interaction and overlap. Thus, under this style of legal thinking, corporations have no

independent place in the arena of public policymaking.

Traditional legal thinking is too limited to properly appreciate how power is exercised

in a modern state such as Japan. As part of a search for a replacement, I find that recent

innovations in regulatory theory – innovations that emphasise the interactive nature of

governance and control – provide a more satisfying conceptual starting point for understanding

power relationships in Japan. New-style regulatory theory expressly includes the corporation

as part of the matrix of power and, therefore, allows a more nuanced understanding of how

public policy is created and implemented. This has immediate relevance for understanding

Japan. As Japan continues its major program of public law reform, current regulatory theory

offers an alternative platform to reinterpret recent administrative law developments and to

critically re-evaluate whether emerging standards of accountability and transparency in

public law will necessarily lead to more open governance in Japan.

The paper revisits the debate on Japanese governance and demonstrates how the debate

has neglected the Japanese corporation as a player in the power stakes. It highlights how

scholars either:

1) exclude the corporation altogether from the debate’s terms of references; or

2) subsume the corporation within one of the two dominant positions in the debate – (that

is, by arguing either that corporate preferences inform political choices or influence

bureaucratic practices) – and thereby fail to ascribe to the corporation a more independent

policymaking role.

The empirical evidence that suggests that corporations are important players in the

power game is then explored. In particular, recent legal and regulatory developments in gender

equity and environmental policy are used as examples to illustrate the relevance of corpora-

tions in the Japanese administrative state. It is then suggested that a rigid reliance on

traditional models of law – which divide power into public and private – is to blame for why

the Japanese governance debate has downplayed the corporation as a site of policymaking. A

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new theoretical approach is needed to understand the governance role of Japanese corpora-

tions, and the paper charts the path of regulatory theory – from traditional command-and-

control regulation to more recent ideas centred on corporate self-regulation – to highlight how

newer-style approaches can aid understanding of how Japanese corporations actively partici-

pate in public policymaking.

The Japanese governance debate: the ‘invisibility’ of theJapanese corporation

Bureaucrats versus politicians

According to Carlile and Tilton (1998: 199), law is the key to understanding Japanese-style

public administration. With the inability of the Japanese legal system to provide firms and

individuals with proper channels to challenge informal government policy, a ‘developmentist

ideology’ – in which bureaucrats are entrusted with responsibility to manage the nation’s

development and security – can prevail unchecked. This means, writes Henderson (1973: 195),

that ‘[r]ather than a rule of law, a rule of bureaucrats prevails’ in Japan.

Ramseyer and Nakazato (1999: 191–219) agree that law is the starting point for

analysing Japanese governance. But they come to a radically different conclusion. The

Japanese legal system, they submit, is a rational system of rules operating under the

umbrella of a parliamentary democracy. Bureaucrats rule according to the whim of Japan’s

political leaders. They do so because their career destinations and salaries are controlled

by the Liberal Democratic Party (LDP). If they do not act within the ambit allowed by the

LDP, the judiciary – also under the control of the LDP (Ramseyer 1994) – will step in to

enforce the LDP’s policy preferences through judicial review. Therefore, they conclude,

Japanese law allows the LDP a stranglehold over public administration because the

essential dynamic underscoring Japanese administrative law ensures an executive and

judiciary loyal to LDP policy objectives.

Not all commentators, however, subscribe to one of these two positions. Some, for

example, see Japanese law in transition (Oda 1992). They argue that Japanese governance

is undergoing a metamorphosis – from administrative fiat to rule by law (Hollerman 1988).

As Milhaupt and Miller (1997) contend, the slow economic growth, financial instability

and political transition mean that informal regulation based on consensus and coopera-

tion is breaking down. In its place, legalism – represented by the growth of formal legal rules

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and procedures – is emerging. The reigns of power, in short, are being handed over from the

bureaucracy to the legislature.

The forgotten corporation

The Japanese governance debate, therefore, reflects a basic tension between bureaucratic and

political power. Thus, some find the weight of power in Japan rests with the ruling LDP party;

others, with the bureaucracy; still others, somewhere in between. In all these myriad positions,

however, the role of Japanese corporations has been overlooked.

Usually, commentators dismiss the role of corporations in public administration on the

implicit basis that corporations are the regulated, never the regulators. Thus, Spaeth (1994)

argues that Japanese corporations comply passively with agency directives. This is because

of a cultural deference to governmental authority, a fear that non-compliance will result in a

loss of future privileges, and the procedural difficulties in obtaining judicial review. Haley

(1991: 139–68) applies an institutional history of Japan to conclude that the Japanese civil

service regulates the private sector by negotiation and encouragement (because it has the

authority to command respect and compliance) and never by force or compulsion (because it

does not have the legal powers to do so). Haley’s view differs from Spaeth in that he

acknowledges that the corporation is accommodated as part of Japanese regulatory design;

but he does not go so far as to suggest that it is an active and independent actor. Ramseyer

and Nakazato (1999: 190–219) use neo-classical economic theory to reach a similar perspec-

tive. Ramseyer and Nakazato believe that the Japanese corporation is regulated according to

a wider LDP political script. The bureaucracy, as an agent of the LDP, enforces LDP preferences

against those of businesses. The judiciary, also as an agent of the LDP, refuses judicial review

when the bureaucracy correctly enforces orthodox LDP policy, but grants judicial review – and

upholds private property rights – when the bureaucracy departs from the LDP position. The

corporation, in short, can never buck the system as masterminded by the LDP. This is not

to suggest that commentators completely discount the power wielded by the Japanese

corporation. Some, such as Patrick and Rosovsky (1976: 47), make a clear case that corpora-

tions act despite the prevailing regulatory environment:

While the government has certainly provided a favorable environment, the main impetus

of growth has been private – business investment demand, private saving, and industries

and skilled labour operating in a market-oriented environment of relative prices.

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Friedman (1988: 5–25) agrees. Japanese corporations, he argues, derive their own

ideas about justice, fairness and propriety as a result of market behaviour; they are not

driven by bureaucratic or political imperatives. Others, such as Tilton (1990) and Uriu

(1996), go further and suggest that corporations are active participants in the policymak-

ing process. Tilton (1990), for example, points to trade associations – private institutions

with the status of quasi-states – as important players in governing the political economy.

Uriu (1996: 8) is even more blunt:

I find that firms and labor have been direct participants in all phases of industrial policy-

making. In many cases, they have actually driven the policy-making process and have

heavily influenced policy decisions. I also find that MITI bureaucrats have not been able

to make and implement policy free from specific industry or political pressures. Rather,

bureaucrats have been subject to strong constraints and pressure from industry and

their political allies.

Even so, these ideas on corporate power still do not perceive the corporation as an

independent source of public policymaking in Japan. They are more limited in their claims.

They see the corporation either as driven by the logic of the market, not the imperatives of

political or bureaucratic policy, or as active lobbyists in both the formulation of policy by

politicians and its implementation by bureaucrats. The first conception, if anything, sees

virtually no link at all – or, at least, a very weak link – between public governance and private

behaviour. The second brings corporations firmly within the push and pull of the politicians-

vs-bureaucrats debate on Japanese governance. This is because corporations are assumed to

bear only a degree of influence on the government and/or the civil service in the arena of public

administration. Ultimate responsibility for creating and enforcing policy still rests with either

one (or both) of these institutions. The corporation is not regarded as having any independent

role to play in developing and implementing public policy.

The Japanese corporation, therefore, remains subsumed within the prevailing param-

eters of the Japanese governance debate – a debate over whether politicians or bureaucrats

rule. Positions vary widely, of course. Do politicians govern? Or do bureaucrats reign supreme?

Or is the true position somewhere in between? In this debate the corporation is regulated by

either – or a combination – of these arms of government. Variations on this theme do exist,

including that corporations are ruled by the market and not governmental institutions, and

that corporations are active lobbyists in existing policy processes and not mere passive

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subjects of regulation. However, corporations are never seen as independent forums for public

policymaking.

Corporate compliance in Japan: the ‘visibility’ of the Japanesecorporation

Including the corporation: ‘offer’ and ‘acceptance’ of power

Recent legal and regulatory developments, coupled with empirical evidence of Japanese

corporate behaviour, suggests that the parameters of the governance debate need to be

adjusted to more fully embrace corporate actors. In fields as diverse as environmental

regulation and gender equity policy, Japanese corporations are finding increasing scope to

devise – and implement – public policies themselves. This is not to surmise that Japanese

corporations share power equally with the bureaucracy and the ruling elite. The available

evidence does not – cannot – back this conclusion. However, the evidence does suggest that

public policymaking in Japan is a more complex whirlpool of interacting agents than the

existing terms of the governance debate permit.

Nor, of course, is evidence of private power in the public sector unique to Japan. With a

shift to privatisation across the globe, corporations worldwide enjoy greater freedom in the

power they may exercise. Some are alarmed by this prospect – witness the popular demonstra-

tions in Seattle against the World Trade Organisation in December 1999, against the

International Monetary Fund in Washington DC in April 2000 and, most recently, against the

World Economic Forum in Melbourne in September 2000. In response, academics and public

officials have called for a fresh debate on corporate social responsibility (Cornell Club 1999).

Once again, even though corporate power is a global phenomenon, this does not reduce its

significance in the Japanese context. If anything, it confirms that Japan is not ‘uniquely unique’

(Dale 1986; Sugimoto and Mouer 1984) and that debates on modern Japanese law, society and

the political economy – such as the governance debate – can draw on international and

comparative trends. As Woodiwiss (1992: 6) powerfully explains:

The reasons why the uniqueness assumption [about Japan] should be rejected are twofold;

first, it owes its existence to the intellectual dominance of a pernicious, quasi-academic

discourse which … we have learnt to call ‘orientalism’. Second, and as a consequence, it

calls into question, for no good reason, the applicability of the social sciences to the Japanese

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No. 302 April 2000

case. According to this discourse, Japan, like all the other societies of what in the eighteenth

and nineteenth centuries was constructed as ‘the east’, is not simply different or even

opposite to ‘the west’, but also its ‘other’ and usually its inferior.

Two interlocking forces have been chiefly responsible for propelling corporations in

Japan (and elsewhere) onto the public policymaking stage. Applying a contract-based analogy

of ‘offer’ and ‘acceptance’, these forces consist of an ‘offer’ of power by legislative grant to

corporations to self-regulate on an issue of public policy, and the ‘acceptance’ of this power by

corporations through the proactive adoption of compliance programs.

The offer

In Japan’s case the offer of power to corporations is invariably by means of legislative grant,

usually packaged in broad statutory language and coupled with a duty – non-actionable in law

– that the corporation must exercise this power responsibly and in good faith. The terms of the

offer involve the legislature setting targets and goals for the corporation to achieve. Although

these may be further clarified by the bureaucracy, responsibility for designing and implement-

ing a program for meeting the targets and goals rests solely on the shoulders of the corporation.

This delegation of public policymaking functions seems to run across constitutional contours

within which Japanese parliamentary democracy nestles. According to Japan’s Constitution,

ultimate power rests in the Diet. As article 41 unambiguously proclaims, ‘The Diet shall be

the highest organ of state power, and shall be the sole law-making organ of the State’. By article

76, executive power rests in the Cabinet, which must administer the law ‘faithfully’ and oversee

the civil service ‘in accordance with the standards set by law’. The Constitution thereby creates

a governmental structure in which enacting policy rests in the legislature and implementing

policy rests with the bureaucracy. Although parliamentary democracy is far from dead in

Japan, the flow of power to the Japanese corporation has arguably complicated this neat

constitutional framework.

The acceptance

The acceptance of this offer manifests itself in the emerging ‘culture of compliance’ enveloping

corporate Japan. Although compliance is not new in Japan, it is becoming more widespread

following the banking crisis in the 1990s (Nomura 1999). ‘Compliance’ describes a proactive

corporate management program of self-regulation on a wide variety of public policy issues. The

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program usually involves redefining corporate goals to specifically incorporate social and

environmental responsibilities, even though these invariably fall outside the original charter

of the corporation. In this way, the phenomenon of corporate compliance exceeds traditional

approaches to corporate governance under which directors are required only to exercise their

business judgment to maximise shareholder wealth. As the Supreme Court held in Ikenaka

v. Tabushi (Judgment of the Tokyo District Court, 16 September 1993, 1469 Hanrei Jiho 25

at 25):

Corporations are entities that pursue profits by entrusting their operations to directors

elected at the general meetings of shareholders. Thus, in principle, the decision of legally

elected directors shall be respected where such decision was made within their authority

and in the best interests of the company, so that the directors may concentrate on

management without being inhibited. In this way, corporations can expect to make

profits. (Emphasis added by the author)

The shift to corporate compliance in Japan, therefore, is not a natural outcome of the

corporate endeavour. What, then, is driving corporations to ‘accept’ the power ‘offered’ to them

by the legislature? Very broadly, the answer lies in the expanding array of legal techniques for

incorporating social responsibilities into the duties of corporate management as well as the

growing rigour of social activism and the increasingly searching public scrutiny of corporate

scandals.

The key legal mechanism for broadening directors’ duties lies in article 266–3 of the

Commercial Code. This article provides that directors are personally liable to third parties

for losses sustained as a result of intentional or grossly negligent dereliction of duties. In the

1969 case of Muto v. Izuo Kokai KK (Judgment of the Supreme Court, 26 November 1969, 23

Minshu 2150), the Supreme Court held that article 266–3 was a special provision designed

to protect third parties (especially creditors). The Court also held that it operated in addition

to, not in combination with, any civil law tort requirements. The voluminous case law on article

255–3 has focused on balancing directors’ responsibilities to protect third parties with their

broader discretion to take business risks. However, at least in theory, the courts would not

allow discretion to act if a business decision amounted to a violation of a law or the Articles

of Incorporation. In such a case, an injured third party could invoke article 266–3 to seek

compensation directly from the directors. This possibility throws open personal liability for

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directors of Japanese companies if a breach of a law or regulation – including those relating

to anti-discrimination, environmental management and product safety – eventuates in

insolvency. Following the collapse of the bubble economy in the early 1990s and the banking

crisis in the mid-1990s to late 1990s, many corporations are becoming increasingly sensitive

to such a risk. As a result, since about 1998, a number of Japanese corporations and financial

institutions have begun establishing internal compliance policies and systems to meet their

responsibilities under the Civil Code, Commercial Code, banking and finance laws, environ-

mental statutes and labour legislation (Nomura 1999).

Another potential legal technique by which Japanese directors and managers may be

held accountable for social responsibilities in the future is via strict vicarious liability for

regulatory offences, coupled with the availability of ‘due diligence’ defences or damages

discounts for having in place a system to prevent breaches. Due diligence defences allow

directors and top management to escape personal liability for a regulatory offence committed

by an agent of the corporation if they can show they had in place an effective internal control

or compliance system to prevent the breach occurring. Unlike in Australia, the concept of ‘due

diligence’ has yet to be entrenched in legislation, but its potential is currently of great interest

to legal scholars. For example, some scholars forecast that Japanese corporate governance law

will soon move in the direction taken by US law and embrace ‘due diligence’ as the tool for testing

directors’ liability for regulatory breaches (Nomura 1999: 47).

A corporate compliance culture is also being fostered by scrutiny of corporate activities

by media outlets and activist groups. Public disclosure of corporate scandals has been

especially important in driving this development (Risuku Defensu Kenkkyukai 1995; Risuku

Defensu Kenkyukai 1997). Negative publicity has made top managements of targeted

companies see social responsibility as a priority for practical reasons of public relations and

brand image, even if liability is not technically a legal issue. In the post-bubble recession that

has gripped the Japanese economy for most of the 1990s, a series of corporate failures and

banking scandals have severely tarnished the image of many Japanese businesses, both

domestically and internationally. The financial sector’s inability to contain bad debt, culmi-

nating in the collapse in November 1997 of Japan’s tenth largest bank, Hokkaido Takushoku

Bank, and fourth largest broking firm, Yamaichi Securities Corporation, led to a widespread

loss of confidence in the Japanese financial system. Multi-billion dollar bailouts of financial

institutions, such as Cosmo and Kizu Credit Unions and Hyogo Bank, and a string of

insolvencies involving major corporations fuelled further public outcry. Reports of corporate

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excesses quickly filled the pages of newspapers: corporations spending lavish sums ‘entertain-

ing’ public officials; securities brokers unlawfully covering the financial losses of their clients;

company directors paying the mafia (sokaiya) to control annual general meetings of sharehold-

ers. With Japan still struggling to escape its longest recession since the war, corporations are

looking to embrace ‘compliance’ programs to restore the public’s faith in their businesses

(Nomura 1999: 45).

Case studies: environmental management and sexual harassment

Two brief case studies – one on environmental management, the other on gender equity in

the workplace – serve to demonstrate the growing importance of corporations in devising

and implementing public policy in Japan. In both case studies, the ‘offer’ of power to the

corporations is made in recent amendments to environmental and equal employment

opportunity statutes.

In environmental management, the relevant statute is the 1993 Fundamental Act on

the Environment (Law No. 91 of 1993). This act merges principles of pollution control and

natural environment preservation into the one legislative framework (Kawashima 1995: 248).

By section 4, one of the key purposes of the Act is to encourage corporations to engage in

sustainable development with as little ‘burden on the environment’ as possible. Although the

Act specifically acknowledges that national and local governments must take suitable

measures to preserve the environment, the statute imposes an express duty on corporations

to seek production methods and business activities that are less taxing on the environment.

Thus, section 8(1) imposes an ‘obligation’ on corporations ‘to take necessary steps’ to contain

pollution and preserve the natural environment. Specifically, corporations must adjust

manufacturing and production processes to ease the burden on the environment; use, as far as

possible, recyclable and environmentally friendly raw materials; and dispose of waste and

byproducts ‘appropriately’ (sections 8(2), 8(3)).

New legislative provisions in the Equal Employment Opportunity Act (Law No. 45 of

1985) set up a similar scheme in regulating sexual harassment in the workplace. In June 1997

the Diet responded to demands by labour lawyers and feminist activists to legislate against

sexual harassment by enacting new section 21 of the revised Equal Employment Opportunity

Act. Section 21, which came into effect in April 1999, provides that employers owe a duty to

prevent sexual harassment occurring in the workplace. More specifically, employers are

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obliged to ensure that their female employees do not endure ‘any sexual words or conduct’ which

lead to unfavourable working conditions for them (so-called quid pro quo harassment) or create

a hostile working environment (so-called environmental harassment).

The Fundamental Act on the Environment and the Equal Employment Opportunity Act

share common traits. First, both statutes use broad and expansive language to invest

corporations with policymaking responsibilities in their respective areas. Second, the statutes

do not establish any system of sanctions should corporations neglect their statutory respon-

sibilities. Third, the acts encourage corporations to work with government (national and local)

and the civil service in exercising their legislative duties, although corporations still retain a

large degree of autonomous discretion in how they do so. Thus, section 8(4) of the Fundamental

Act on the Environment requires corporations to ‘cooperate’ with national and local govern-

ments as part of a ‘coordinated’ approach to environmental management, but does not reduce

the considerable scope corporations have in devising and implementing their own in-house

environmental policies (Nemoto 1999: 5). Similarly, section 21 of the Equal Employment

Opportunity Act provides that the Ministry of Labour is authorised to issue guidelines

clarifying the substantive duty on corporations to regulate on sexual harassment. When, in

March 1998, the Ministry of Labour issued its first set of guidelines, the Ministry did little

to direct corporations on how they should handle their legislative role. Rather, it merely

confirmed that corporations were required to draft a corporate sexual harassment policy,

distribute it to all employees and educate their workforce as to its purport. It also mandated

that corporations should set up internal systems to provide counselling services and to handle

complaints of alleged harassment ‘appropriately and flexibly’.

Both statutes, therefore, entrench a system of private governance of public rights – that

is, a system of intra-corporate regulation of environmentalism and sexual harassment

respectively. Under the legislative schemes, private ‘governments’ (corporations) must handle

the public rights of environmentalism and gender equity in accordance with their relevant

policies. In both of these public issues, the discretion to customise policy – in terms of designing

measures to combat environmental degradation and implementing procedures to resolve

individual sexual harassment disputes – is, although not total, very wide.

Recent empirical evidence demonstrates that corporations have not been reluctant in

engaging with these policymaking powers. This is especially so in environmental management

(Nemoto 1999). A survey of 500 publicly listed corporations by the Science and Technology

Policy Research Institute in May 1994 revealed that 98 per cent of the 263 companies that had

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responded to the survey had developed internal environmental policies (Nemoto 1999: 1–2).

According to the survey, the motivating factors behind the uptake of environmental policies

by corporations included: the desire to fulfil corporate social responsibilities (98.0 per cent);

the wish to improve the corporation’s image in the community (82.1 per cent); and the need to

obey social regulations (60.3 per cent).

The latest statistics from Japan on corporate compliance with sexual harassment law,

although less dramatic, are similarly compelling. The evidence clearly points to a steady

increase in corporate policymaking concerning sexual harassment over the last decade. In

November 1989, when sexual harassment was still a relatively new topic of public debate, a

survey by Asahi Television showed that 78 out of 80 companies had not given much thought

to introducing policies on sexual harassment (Moronaga 1989: 11). By the late 1990s, little

had changed. In 1997 a survey of 2,254 companies and 6,762 employees indicated that only 5.5

per cent of companies had implemented systems to prevent sexual harassment, with another

14.5 per cent planning to do so in the near future (Shokuba in Okeru Sekushuaru Harasumento

ni Kansuru Kenkyukai 1998). In 1999, with the new sexual harassment provisions in the Equal

Employment Opportunity Act taking effect from April, a survey of 322 corporations revealed

28.1 per cent had established an internal grievance-handling unit, with a further 23.5 per cent

preparing to do so. According to this same survey, however, 80 per cent of companies self-

reported that they had at least taken some steps to respond to the issue of sexual harassment

in the workplace. These steps included incorporating new rules in the employees’ code of conduct

(55 per cent), amending the internal manual to add information about sexual harassment (34.8

per cent), establishing awareness and training programs (27 per cent), preparing and distrib-

uting information pamphlets (24.2 per cent) and developing an internal sexual harassment

policy (14.6 per cent). Larger corporations are leading the way on dealing with the issue of sexual

harassment: 100 per cent of companies with over 3,000 employees self-reported that they had

taken action on combating sexual harassment, compared to 88.5 per cent for companies with

between 1,000 and 2,999 employees and 70.7 per cent for companies with less than 1,000

employees (Rosei Kenkyujo Henshubu 1999: 6–7).

Beyond traditional legal thinking: new conceptual ‘glasses’ torender the invisible Japanese corporation visible

This evidence of corporate engagement with public policymaking in Japan immediately

questions the characterisation of Japanese governance as rule by either politicians or

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bureaucrats. With policy powers invested by law and embraced by management, corporate

Japan can no longer be ignored as a power-wielding agent in the public policy arena. But how

do we refocus the debate so that it includes the corporation?

The answer lies in developing new theoretical ‘glasses’ to render the invisible corporation

visible. This involves two steps. The first is to deconstruct the underlying conceptual model

that has allowed the prevailing orthodoxy about Japanese governance to ignore the function

of the corporation in favour of the bureaucrat-vs-politician dualism. The second step is to

replace this conceptualisation with new theoretical tools to achieve a more nuanced under-

standing of the interactive nature of power generally and policymaking in the private domain

specifically.

The private/public divide

A conceptual oversimplification of law explains the current invisibility of the corporation from

the Japanese governance debate. The oversimplification rests on the categorisation of law into

‘public’ (e.g. administrative) law and ‘private’ (e.g. corporate) law. This two-fold classification

artificially assumes that the ‘public’ and the ‘private’ are two separate circles in a Venn

diagram with no points of intersection and no areas of overlap. According to this logic, any

discussion of public policymaking means interrogating the roles of public institutions - the

legislative, executive and judicial arms of government. Private actors, such as corporations,

are excluded from this conceptual picture.

The evidence of this conceptual reasoning is ubiquitous in the Japanese governance

debate. This is because the competing perspectives on the respective roles of the legislative

and executive arms of government in governance in Japan are premised on the relative

importance scholars attach to the phenomenon of administrative guidance. Put simply,

administrative guidance refers to the practice of informal implementation of policy,

including taking actions that an agency may not have legal authority to institute. Since

administrative guidance is assumed to play a similar role to compulsory regulation in

other capitalist systems, ‘it is easy then to conclude, if one begins with the assumption of

the ministries’ power, that administrative guidance is remarkable because it achieves

results that are impossible in other systems without binding legal power. Conversely, if

one assumes bureaucratic impotence, it is easy to dismiss administrative guidance as

toothless rhetoric’ (Upham 1997: 399).

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For example, those who argue that Japanese ministries exert an all-powerful influence

on Japan’s political economy usually invoke the reasoning that administrative guidance

effectively precludes judicial review (Ramseyer and Nakazato 1999: 205). Thus, van Wolferen

(1990: 215) contends that lack of judicial review of administrative decisions in Japan ‘had had

the effect of totally insulating bureaucratic activity from judicial review’. According to

Saunders (1996: 373), ‘informal decisions are not reviewable, because most of what MITI and

other agencies do is informal and a matter of ‘guidance’, not a legal ‘disposition’, and therefore

is not reviewable’. And, according to Johnson (1995: 79), ‘administrative guidance by Japan’s

powerful state bureaucracy can often result in rampant lawlessness in favor of those enter-

prises and interests that enjoy privileged access to the bureaucracy’.

This line of reasoning is invariably accepted uncritically by scholars of corporate law who

conclude that Japanese corporations are passive recipients of administrative guidance

(Bottomley 1999: 42):

Regulation of corporate law in Japan is the responsibility of the Ministry of Justice, acting

through its Local Legal Affairs Bureau. The Ministry of Finance, via the Securities and

Exchange Law, has jurisdiction over takeovers, stock exchange listings, supervision of

securities businesses, securities market surveillance and, together with the Bank of

Japan, foreign corporations.

In carrying out their regulatory functions, Japanese administrative agencies rely to

a considerable degree on unofficial administrative guidance (gyosei shido) in addition

to legislation and subordinate regulations. The practice of administrative guidance has

been described as a regulatory technique that – although generally non-binding – seeks

to conform the behaviour of regulated parties to broad administrative goals. For example,

the Ministry of Finance might impose restrictions on certain securities trading activity

by administrative guidance rather than relying on statute.

The opposite viewpoint, by contrast, maintains that administrative guidance is merely

part of a richer fabric of formal administrative law. According to this argument, administrative

guidance is subject to administrative review, especially if the guidance contradicts the pro-

capitalist preferences of the LDP (Ramseyer and Nakazato 1999: 205–6):

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[C]laims of virtual non-reviewability [of administrative guidance] are wrong – and wrong

because they both miss the obvious and misstate the law. They miss the obvious because

to obtain judicial review of administrative guidance, a firm need simply flout it. The agency

will then either roll over and play dead or it will sue. If it takes the first tack, the firm wins.

If it takes the second, the firm obtains its review.

[A]ccounts of [non-reviewability] misstate the law because they miss what courts

actually do.

Toward a theory of interactive governance

The division of law into ‘public’ and ‘private’, which undercuts the debate over Japanese

governance, borrows conceptually from the theory of command-and-control regulation. Com-

mand-and-control regulation assumes a style of regulation in which standards are imposed

on corporations and backed by criminal or civil sanctions (Ogus 1994: 5). The private/public

dichotomy accommodates the design of command-and-control theory wherein regulation is

divided hierarchically into ‘top’ (the commander) and ‘bottom’ (the controlled), for the private/

public dichotomy splits law spatially into ‘left’ and ‘right’. Here public law is assigned to the

domain of the commander and private law is assigned to the domain of the controlled. In this

way, the governance debate excludes the Japanese corporation because of two dovetailing

conceptual assumptions: first, public law cannot recognise an autonomous role for private

policymaking actors; and, second, public institutions are the ‘commanders’ and private firms

are the ‘controlled’.

Since the early 1980s, however, scholars and policy analysts have criticised command

and control regulation from two main perspectives: an economic analysis that sees the costs

of assessing, understanding and complying with command-and-control regulation as unac-

ceptably high; and a socio-political analysis of the ineffectiveness of this type of regulation to

produce compliance with regulatory objectives. The experience of command-and-control

regulation shows that it is neither reasonable, practical nor effective for external legislatures

and regulators to be solely responsible for determining how organisations should manage

social issues (Bardach and Kagan 1982). The design and enforcement of regulations to govern

every potential social dilemma facing business is simply not achievable. And even if it were

achievable, it would not make businesses better citizens, since citizenship implies an internal

capacity to respond with integrity to external values (Selznick 1992).

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John Braithwaite (Grabosky and Braithwaite 1986; Ayers and Braithwaite 1992;

Braithwaite and Makki 1993; Braithwaite 2000) has led calls for a new model to replace

command-and-control regulation. As the foremost scholar on empirical and theoretical

accounts of corporate accountability, he has analysed how scrutiny by regulators and public

interest groups – combined with the background threat of ‘big stick’ legal sanctions and

negative publicity – can maximise the potential for corporate self-regulation. For example,

Ayres and Braithwaite’s (1992) theory of responsive regulation suggests that, in general, it is

better to maximise the possibility that regulatees will comply with regulatory objectives

voluntarily than to constantly rely on heavy sanctions or coercive regulatory regimes. They

found empirically that when regulators use strategies of ‘dialogue, communal judgment,

reciprocal wooing, and persuasion, which is minimally coerced by power relations’, they can

negotiate more constructive regulatory outcomes (Ayers and Braithwaite 1993: 97). By

contrast, when regulators use coercive strategies, they often break down the goodwill and

motivation of actors who might otherwise have been responsive. However, they also found that

persuasive and self-regulatory regulation is more likely to be effective when backed up by the

possibility of more severe sanctions: regulatees, then, will know there is a certainty of

punishment if they defect and that other regulatees will not get away with breaking the rules.

This reconceptualisation of regulation as an interactive dynamic between regulator and

regulatee immediately exposes the public/private dichotomy as a false divide. This has

important implications for redefining the Japanese governance debate. By rejecting public

governance as the sole province of the public sector, the parameters of the Japanese governance

debate may be widened to reflect growing empirical evidence of private sector participation.

Upham (1997) takes the first step forward in this direction. Upham criticises the

emphasis scholars have placed on administrative guidance in the governance debate, ques-

tioning whether the attention on administrative guidance provides any meaningful clues on

how Japan governs itself (1997: 399):

The problem is that the structure within which regulation operates often makes

the debate on administrative guidance irrelevant. In fields as distinct as land use

planning and broadcast licensing, Japanese bureaucrats delegate their public

power to private parties and function not as direct overseers of regulatory policy,

but, at most, as overseers of its private implementation. This pattern frequently

extends to the formation of policy as well as its implementation, and the bureau-

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cratic role diminishes to intervention at moments of political crisis. At other times,

the agency plays an active monitoring and enforcement role, but seldom does a

Japanese agency play the role that one would expect from the classic models of

economic regulation.

Upham’s response is to formulate a new theory on Japanese public administration – the

delegation of public policy issues to private citizens. Under this theory, Japanese regulators

delegate part or most of their power to private parties. In many cases, regulated parties can

make their own decisions without any principled bureaucratic oversight. ‘The administrative

agency may intervene during times of political crisis, but rarely does so in the ordinary course

of regulation, instead choosing the cheap and safe course of delegation’ (1997: 401–2). Upham

refers to this as the privatised model of regulation (1997: 399–404). This often occurs with

policy issues which are chiefly economic or commercial in character. An example is the

administration of the Large Scale Retail Stores Act (Law No. 109 of 1973) by the Ministry of

Trade and Industry (MITI). According to the Act, MITI is required to make an independent

determination as to whether or not to permit development of a large-scale retail store (sections

5, 7–14). Thus, the statutory procedure formally requires MITI, upon receipt of a notification

from the developer of its intention to build a large-scale department store (section 5), to send

the plans of the proposed store to two deliberative councils for more detailed consideration.

Once the councils report back to MITI with their recommendations (sections 7–14), MITI must

then reach an independent judgment based on the interests of consumers and the retailing

industry (section 11). In practice, however, MITI requires developers to consult directly with

local merchants and to reach a negotiated agreement on the conditions under which both would

agree to the opening of a new store (Upham 1997: 409).

The empirical evidence from environmental management and sexual harassment policy

suggests a trend in administrative practice that goes even further than Upham’s model. Unlike

in Upham’s model, the Basic Act on the Environment and the Equal Employment Opportunity

Act do not delegate regulatory authority to those who are being regulated; it shifts entirely the

decision-making forum to a completely private domain – the corporation. Policymaking is

relegated (to corporations) rather than delegated (to private parties). This style of regulation

may be described as a corporatised model of regulation. It appears to be more common with

social and environmental policy issues. For example, concerning sexual harassment in the

workplace, the Ministry of Labour has not provided a ‘regulatory space’ within which female

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victims of sexual harassment and their employers can ‘create their own decision-making

structure’ (Upham 1997: 401). Instead, the Ministry charges corporations with full

responsibility to implement and operationalise their own compliance programs on sexual

harassment.

Conclusion

These developments mean that we should aim to elevate the debate over who governs

Japan to a more sophisticated level by applying recent advances in regulatory theory to

reinterpret recent empirical evidence of corporate engagement with public policymaking

in Japan. This paper has argued that the Japanese governance debate to date has

neglected the role of the Japanese corporation because of a conceptual oversimplification

of law into ‘public’ and ‘private’. Accordingly, the debate has lacked the conceptual

tools to accommodate empirical evidence of policymaking by private firms. This

evidence reveals that, in areas of environmental and anti-discrimination policy, corporations

have played a significant role in defining and articulating standards of public policy.Recent innovations in regulatory theory – in which governance and power are perceived

as an interactive encounter between regulator and regulatee – provide a more satisfying

theoretical springboard from which to relaunch a discussion on governance in Japan. By

applying these newer theoretical ideas, we may see alternative models of regulatory behaviour

in Japan – such as delegated regulation in the case of economic policy and relegated regulation

in the case of environmental and social policy – which have been ignored in the debate over the

past 30 years.

But resetting the parameters of the debate and providing answers to the paradox of

power in Japan are distinct tasks. The analysis developed in this paper probably raises more

questions than it answers. For example, is the trend of private governance of public rights a

long-standing development – or is it a recent aberration? Is it a good thing? And how

autonomous is corporate policymaking – or is there scope for it to be manipulated by political

leaders, contaminated by bureaucratic interference and/or constrained by judicial oversight?

These are future problems for Japanese studies scholars.

A more pressing question is whether or not evidence of corporate policymaking negates

recent administrative reform efforts to make Japan more transparent by shrouding some

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public decision-making processes beneath the corporate veil. This question is of particular

relevance in light of the latest swathe of legislative reforms aimed at promoting greater

transparency in public decision-making processes.

The reform process kicked off on 1 October 1994 when the new Administrative Procedures

Act (Law No. 88 of 1993) took effect. The Act requires administrative agencies to publish

criteria necessary for determining administrative applications, to make their determinations

within a reasonable period of time, and to supply reasons for denying applications (sections

12–37). The objective behind these requirements is to protect citizens’ rights by providing

general and uniform rules for administrative actions such as dispositions, administrative

guidance and notifications, thereby advancing ‘a guarantee of fairness and progress towards

transparency’ (section 1). More recently, on 14 May 1999, the Diet passed the Information

Disclosure Act (Law No. 42 of 1999), a broad-based freedom of information statute that allows

citizens to access information held by government agencies (section 1). The Act is premised

on promoting ‘fair and democratic’ public administration under which agencies owe a duty to

‘explain’ their functions, provide citizens with access to relevant government information and

encourage more informed debate about governmental activities and services (section 1).

Finally, on 8 July 1999, the Diet passed two packages of bills that seek to trim the number

of government ministries from 23 to 13 by 2001 (Central Ministries and Agencies (Reform)

Act, Law No. 103 of 1998, sections 5 and 7). Ostensibly an attempt to cut the bureaucracy –

and thereby curb its power – the packages will also grant more authority to local governments

(section 32) and strengthen the role of the Cabinet in policymaking (sections 6–10). The stated

rationale behind this legislative reform is to replace a corpulent, rigid and top-down system

of public administration with a more streamlined, efficient and transparent model.

In contrast to the goals of these public law initiatives, corporate governance is a system

of private and potentially unprincipled decision-making that takes place within the four walls

of the corporation. This raises a potential conflict between the stated goals in public law of

transparency and the reality in private law of (at least some) public decision-making in fields

such as sexual harassment and environmental management. Applying self-regulation theory,

the clue to the future of the push to transparency in Japan might be the extent to which the

policies of corporate ‘governments’ are subject to scrutiny by the public, the media, social

movement activists and the government.

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Note

1 Lecturer in Japanese Law in the Faculty of Law and Research Fellow at the Australia–Japan Research Centre, The Australian National University. I would like to thankProfessor Shozo Yamada of Chuo University in Tokyo and Dr Jennifer Amyx, ResearchFellow in the ANU’s Research School of Pacific and Asian Studies, for their helpfulcomments. I would also like to thank my research assistant, Elsa Gilchrist, for helpingme sift through volumes of legislative materials and commentary.

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